Chinese Supplier Subcontracts Without Consent: Can the Buyer Terminate and Recover Its Payment?

Start with the commercial decision and four facts

This guide concerns business procurement and manufacturing involving a mainland Chinese supplier. It does not apply construction-project subcontracting prohibitions to ordinary goods production. The PRC rules discussed apply where PRC law governs the relevant issue; check the CISG separately for international sales. A buyer's country of residence does not itself determine the governing law.

Establish what you bought, which work moved, who approved what, and what the change actually prevents you from receiving. Distinguish a standard product purchase from a contract for particular work; a core manufacturing operation from an auxiliary process; and a production site from a warehouse or freight forwarder. These facts matter more than an unexplained photograph of a new address.

A four-route decision sequence

PRC Civil Code Articles 595 and 770 describe sales and work contracts respectively. Article 15 of the SPC Contract General Provisions Interpretation requires attention to the substance of the relationship rather than its label. Examine the promised result, technical input, materials, production duties and the reasons for selecting the supplier. Neither the word OEM nor the source of materials decides every case.

• PRC work contract; main work transferred: check the agreed permissions and the customer's consent. Article 772 may provide a specific termination right without first proving defective goods.
• PRC work contract; auxiliary task transferred: Article 773 generally permits outsourcing while retaining the original contractor's responsibility. An additional contractual restriction needs its own breach and remedy analysis.
• Ordinary sale: establish whether the approved site, no-subcontracting restriction, audit access or prior approval process became binding terms. A seller's use of another producer is not automatically a refund event.
• CISG sale: apply the Convention and the contract to the governed questions. Do not import the domestic work-contract termination rule merely because the goods are custom-made.

What counts as main work, and what did the buyer consent to?

Under Article 772, a contractor should perform the main work using its own equipment, skills and labour unless otherwise agreed. It remains responsible for main work entrusted to a third party; without the customer's consent, the customer may also terminate. Article 773 separately permits auxiliary work to be entrusted to another party, with responsibility retained by the contractor.

A process name or percentage of price is not a universal classification test. Consider its role in the promised result, technical requirements and the contract's reliance on that contractor. Painting or assembly, for example, cannot be labelled auxiliary for every product.

Check consent by entity, operation, batch and time. Approval for one process or order may not approve an entire future production programme. Preserve the request, attachments, decision-maker's authority and the buyer's conduct after learning the facts. SPC Interpretation Articles 1–2 require contextual interpretation and proof of any trade practice relied on; a supplier cannot simply assert that everyone outsources.

For a PRC work contract, Article 779 requires necessary supervision and inspection to be accepted without obstructing normal work. It does not authorise forcible entry into a third-party site. Arrange access and records through the contractor. For an ordinary sale, a factory-audit entitlement especially needs a contractual foundation.

Custom manufacturing may still be a CISG sale

CISG Article 3(1) generally treats contracts for goods to be manufactured as sales, unless the buyer undertakes to supply a substantial part of the necessary materials. Article 3(2) excludes contracts where the preponderant part of the supplier's obligations consists of labour or other services. Custom design, private labels and OEM branding therefore do not themselves exclude the Convention. Check business locations, contracting-state status, declarations and any effective exclusion under Article 6.

Where it applies, examine both the goods requirements in Article 35 and any separate agreed production-site or approval obligations. Passing a product test does not necessarily cure a proven breach of a factory restriction. Conversely, a procedural breach does not necessarily justify avoidance. Articles 25 and 49 generally require a fundamental breach that substantially deprives the buyer of its contractual expectation, subject to the foreseeability qualification.

The additional-period route in Article 49(1)(b) concerns non-delivery. A buyer cannot convert every unauthorised-subcontracting dispute into a right to avoid simply by sending a short cure deadline. If approved production is essential to downstream acceptance, prove that the requirement was part of this contract, its importance was communicated and the change has consequences that cannot adequately be remedied. A retailer's sourcing policy is not automatically a PRC statutory refund right.

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Separate termination, repayment and the outstanding balance

For a PRC-law claim, examine Article 772, any agreed termination trigger and other grounds such as Article 563. Exercise an established right by the appropriate notice under Article 565 and preserve evidence of arrival. SPC Interpretation Article 53 confirms that the other side's failure to object does not create a termination right that never existed.

Article 564 gives priority to an applicable statutory or contractual exercise period. Without one, the right generally expires after one year from knowing or being expected to know the ground, or after a reasonable period following the other party's demand to exercise it. Article 199 separates this expiry from limitation periods; a demand that interrupts limitation does not thereby extend a termination right. Article 787 also allows a customer to end a work contract before completion, but requires compensation for resulting contractor loss. That is a different cost route from termination for unauthorised transfer of main work.

If the CISG governs, avoidance must be declared by notice under Article 26. Where goods have been delivered, Article 49(2) additionally requires declaration within a reasonable time under its specified circumstances. Do not import the PRC one-year rule as a uniform waiting period under the Convention.

Repayment needs a settlement of what was performed and what is being terminated. Civil Code Article 566 and CISG Article 81 address restitution within their respective regimes. Delivered or used goods, work in progress, buyer materials and damages cannot all be treated as a single untouched deposit. CISG Article 82 also addresses the condition in which goods can be returned and exceptions. Termination does not guarantee an immediate full cash recovery.

Analyse the unpaid balance independently. Civil Code Articles 525–526 concern the performance sequence and corresponding refusal; Articles 527–528 impose evidential, notice and assurance requirements where a party due to perform first suspends for insecurity. CISG Article 71 likewise requires an apparent failure to perform a substantial part of the obligations, immediate notice and resumed performance after adequate assurance. Suspicion alone is not a licence to withhold all money across unrelated orders.

Build evidence around what each item proves

Ask the supplier to identify the actual company, site, operations, dates, affected orders, goods and tooling locations, and its claimed approval. Connect photographs and inspection records to batches. A refusal to admit an inspector and a failed quality inspection are different facts. Collect records lawfully; do not enter facilities or systems without permission.

• The promise: signed agreements, purchase orders, approved factory lists, questionnaires, technical schedules, approval procedures and original email attachments showing which requirements were agreed.
• The transfer: dated production and inspection records, batch identifiers, manufacturing movements, supplier admissions and lawfully obtained entity details. Separate factories from warehouses and shipping agents.
• Consent or its limits: the complete approval request and response, authorised decision-makers, permitted operations, quantities and periods, and specific objections after discovery.
• Commercial impact: failed standards, rework options, retesting or freight costs, downstream cancellation or chargeback documents, disclosed intended use and mitigation records. Revenue is not the same as recoverable loss.
• An executable exit: payments and recipients, undisputed balances, goods and tooling inventories, notice evidence, dispute clauses, responsible entities and identifiable assets.

Keep the original supplier in the liability analysis

Articles 772–773 retain the contractor's responsibility for outsourced work. Civil Code Article 593 also provides that third-party causes of breach do not simply remove a party's responsibility to its contractual counterparty. Under the CISG, third-party non-performance is not an automatic exemption either; Article 79 has demanding conditions.

The actual factory does not automatically owe the buyer a joint refund. A direct claim requires a separate basis, such as its own contractual undertaking, a genuine joint-work arrangement or another established cause of liability. Shared branding, contacts or a bank account are not enough on their own.

If that factory demands another payment before releasing goods, investigate the production chain, ownership and any retention or delivery refusal before paying. A second payment may fail to discharge the amount due under the original contract. A negotiated three-party arrangement can specify the payment credit, release of goods and tooling, remaining liabilities and consequences of default. Do not take disputed property by force.

Choose controlled continuation or an organised exit

When evidence is incomplete and shipment is close, send a factual request and reservation of rights identifying the records and batches to be confirmed. Set a workable response time. A buyer-selected 24- or 48-hour deadline is not a statutory grace period or an automatic termination trigger, and it does not postpone an existing payment or legal deadline.

If continuing makes commercial sense, limit any new approval to identified entities, operations and batches. Agree verification, samples or testing, delivery and payment conditions, continuing responsibility of the original supplier and the treatment of existing claims. If exiting, distinguish the legal ground, affected orders, refund, goods disposition, return of materials and drawings, and evidence retention.

Under Civil Code Articles 584 and 591, and CISG Articles 74 and 77 within their scope, damages require causation, foreseeability and mitigation. Downstream penalties, emergency air freight and replacement-purchase differences are not automatically recoverable merely because invoices exist. Explain necessity, reasonable alternatives and net loss, without double recovery or ignoring saved expenditure.

Defences, separate clocks and urgent China advice

Expect arguments that the arrangement was a resale rather than a work contract, only auxiliary work moved, outsourcing was pre-approved, an authorised buyer employee consented, the location was only storage, the contract remains capable of proper performance, or the buyer's late payment or design changes caused the problem. Test each against the documents. An unverified subcontracting allegation is not a finding of fraud.

Where goods are non-conforming, comply separately with examination and specific notice requirements. CISG Articles 38–40 address prompt examination, reasonable-time notice, the usual two-year outer notice limit and exceptions; that outer limit is not a period for filing suit. Where PRC limitation rules apply, Article 188 generally provides three years while Article 594 provides four years for international goods-sale disputes. Accrual and interruption require their own analysis; neither clock should mechanically start on the day a different factory is discovered.

Seek prompt China advice if production or shipment is about to finish, payment or termination deadlines are close, tooling or technical files have moved, the actual factory is withholding goods, or recovery assets appear at risk. Provide the contract, batch evidence, approval history, payments and dispute clause first. Demand work, litigation, arbitration and possible preservation should be assessed against the chosen procedure, respondent and any security requirements. A favourable decision is not money collected.

Make future subcontracting controls operational

Specify approved legal entities and sites, main and permitted outsourced operations, the authorised written-approval process, batch traceability, subcontractor confidentiality and restricted use of files, necessary inspection arrangements, correction, payment conditions and exit handover. For PRC work contracts, Article 785 also requires confidentiality according to the customer's requirements and restricts unauthorised retention of copies or technical materials; identify the protected material and permitted recipients in the contract.

Use the existing supplier-verification, pre-shipment-inspection, defective-goods and tooling-ownership guides for those separate decisions. State that approval of a subcontractor does not itself release the original supplier. A bare no-subcontracting sentence is less useful than a clear way to disclose, verify, pay and exit.